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    ENGLISH EDITION OF THE WEEKLY CHINESE NEWSPAPER, IN-DEPTH AND INDEPENDENT
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    China Cuts Loan Rate and Deposit Reserve Ratio
    Summary:

    In a move to boost liquidity in Chinese financial institutions to support growth, the People's Bank of China (PBOC) has lowered the lending rate and deposit reserve ratio, effective from Sept 16 and 25 respectively.

    The Chinese central bank mandated that the benchmark yuan-denomination loan interest rate be lowered by 0.27 percentage points to 7.20%. The present deposit interest rate however remained unchanged at 4.14%, according to a statement released on Sept 15.

    In addition, the central bank cut back one percentage point on the deposit reserve ratio for deposit-taking financial institutions but excluded the six large state-owned banks, namely the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Post Savings Bank of China.

    As for financial institutions in the Sichuan quake-hit areas, the deposit reserve ratio was lowered by two percentage points.

    The PBOC said the rate cuts were in line with the State Council's plan for the next half of this year and to promote healthy and fast growth for the national economy.

    Zhou Mingjian, an analyst at Pacific Securities Company, held that the move "may signify a turning point for the current tightened monetary policy".

    Some financial experts remarked that the new rates and freed-up liquidity would help to ease credit difficulties faced by small and medium enterprises (SMEs), who had encountered cash flow problems as credit lines tighthened while exports dropped and the yuan appreciated.

    In order to prevent the Chinese economy from overheating and to ward off inflation, the Central Economic Working Conference decided last December to "tighten monetary policy".

    Last year alone, the central bank upped interest rate five times and increased 10 times the reserve ratio. This is the first time in six years for lowering interest rate while the last drop in reserve ratio was back in late 1999.

    Some export-based SMEs in coastal China, like Zhejiang, had reportedly turned to usury businesses for credit lines during the past months.

    Based on central bank statistics, between January and August this year, yuan-based loans by financial institutions increased by 3.1 trillion yuan, or 29.1 billion yuan more than the same period last year.

    Back in 2007, between January and August, loans given out increased by 3.08 trillion yuan, or 543.8 billion yuan more than the previous year's corresponding period. The data clearly showed the effect of tigthening policy.   

    By last month, inflationary pressure appeared to be ebbing, as China's consumer price index fell to 4.9% in August, its lowest level in 14 months, after reaching its 12-year peak of 8.7% in February.

    This new development, coupled with worries that the Chinese economy was slowing down and growth rates might drop to single digits, had prompted calls for a more relaxed credit environment.

    However, around the same time, the China Banking Regulatory Commission was reviewing a series of regulations on reinging in the commercial banks' lending to individual and corporate clients.

    The EO learned that the proposed regulations stated that for individuals, the monthly credit limit would be capped at 50% of their monthly salary; for financial institutions, they would need to adhere to strict assessment of borrowers and projects' funding and operation background, and build up an early-warning and quality control system.

    Among the objectives of the commission's move was to reduce risks of non-performing loans.

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